Indonesia’s total external debt, which includes government and private sector
debt, is $144 billion,2 an amount roughly equal to the country’s
total annual economic production (GDP) of $160 billion. The
government’s total debt, which includes external and domestic
debt, was $134 billion at the beginning of 2000. This represents an
increase of $81 billion in the 2.5 years from the middle of 1997 before
the economic crisis until the beginning of 2000. This increase in debt
is even more shocking when measured against the size of the Indonesian
economy. During the same 2.5 year period, government debt as a percentage
of GDP jumped from 23 to 83 percent.
No other government in the world has experienced such a massive increase
in debt in such a short time period since the end of World War II.3
Indonesia now ranks as the most deeply indebted major country in the
world. It is very doubtful that Indonesia will be able to dig itself
out of this debt crater. No country was more badly damaged than Indonesia
in the financial crisis that hit parts of Asia in 1997 and 1998. As
other countries in the region show signs of recovery, Indonesia remains
in the firm grip of a severe economic collapse. Even with the most
optimistic assumptions, Indonesia’s debt situation for the next five
to ten years is grim. The World Bank believes that with effective economic
policies and a return to strong growth, Indonesia can reduce the government
debt burden to 67% of GDP in five years and 46% of GDP in ten years.
Thus by the year 2010, Indonesia can look forward to having a government
debt burden twice the 1997 pre-crisis level of 23% of GDP.

And
yet even this grim outlook is probably too much to hope for. Government
policy, particularly for the economy, is either non-existent or chaotic.
Violent conflicts are increasing around the archipelago. The debt burden,
which will consume 40% of government revenues for the foreseeable future,
is draining the country’s economic potential. And like a vicious circle,
the weak economy means the country cannot rely on a sharp increase in
investment and rapid growth to solve its debt problem in the future.4
Indonesia is in a classic debt trap in which new loans are used to service
old ones. A simple Debt Burden Index (DBI) tells much of the story.
If we divide the external public debt as a percentage of GDP (a measure
of the relative size of the debt) by the GDP growth rate (the capacity
to grow out of the debt problem), we can assess how heavy the debt burden
is.

This table shows that Indonesia’s
debt burden index (27.8) is slightly higher than that of the Philippines
(23.9), 2.5 times as heavy as Thailand’s (11.4), six times as bad as
Malaysia’s (4.4), and twelve times as heavy as China’s (2.3). Theoretically,
the Indonesian government should be able to recover some of its domestic
debt by selling assets controlled by the Indonesian Bank Restructuring
Agency (IBRA). However, IBRA is almost completely dysfunctional. And
as time goes on, the burden on the state has increased because the cost
of restoring the banking system has increased, interest rates the government
must pay have risen as Bank Indonesia has tried to defend the rupiah,
and at the same time the value of the assets held by IBRA has declined
by a third, according to one estimate.6

The
following table provides the latest data available on the levels and
composition of Indonesia’s total external debt.

INDONESIA'S EXTERNAL DEBT

(as of March, 2000 / US$ millions)

TOTAL
EXTERNAL DEBT

144,492

A.

PUBLIC
SECTOR

85,940

1

Government

75,292

Multilateral <1)

30,620

Bilateral

25,695

FKE

15,619

Leasing

717

Commercial 2)

2,640

2

State
Banks

4,678

Bank
Credit

4,667

Domestic
Sec. Owned by Non Resident

11

3

State
Enterprise (Pertamina, Garuda & Others)

5,970

Bank
Credit

5,145

Domestic
Sec. Owned by Non Resident

825

B.

PRIVATE
SECTOR

58,551

1

Private
Banks

5,711

Bank
Credit

5,711

Domestic
Sec. Owned by Non Resident

-

2

Private
Companies

52,840

Foreign
Direct Investment (PMA)

27,912

Non
Bank Financial Institution (LKBB)

966

Private
Enterprises (BUMS)

7,032

Domestic
Investment (PMDN)

14,463

Domestic
Sec. Owned by Non Resident

2,467

Note
:

1)

Includes
IMF $10.4 billion

2)

Includes
$256.2 million in SBIs owned by non-resident

Source:
Central Bank of Indonesia

There are several points worth
noting in these figures. First, of the total external debt, 60 percent
is public debt accumulated by the Indonesian government and state enterprises,
while 40 percent is foreign debt of private companies. Second, almost
all of the government’s foreign debt is to lenders of official capital,
whether bilateral or multilateral. This is significant because it means
negotiations on the debt have the potential of being based more on political
rather than economic considerations (just as most of the initial lending
was politically driven as the West sought to uphold the Suharto dictatorship
supposedly to defend democracy during the Cold War). And finally, it
is rarely mentioned that almost half of Indonesia’s private sector foreign
debt is held by foreign companies operating in Indonesia (PMA, $27.9
billion).

If
we look at Indonesia’s balance of payments figures during the last five
fiscal years, it is evident that foreign borrowing has played a major
role in closing a serious deficit in Indonesia’s external transactions
of goods and capital (precisely the same role it played during the late
1960s and again as oil prices collapsed in the early and mid 1980s).
A country earns foreign exchange by selling things to the world as exports
(column 1), government borrowing from abroad (column 5), or having a
positive net flow of foreign private capital (column 6, which
shows net direct investment and private loan flows). Likewise, a country
spends foreign exchange by buying things from the world as imports (column
2), repaying government debts (column 3), and having a
negative net flow of foreign private capital (again, column 6).

Notice
first that despite a push to make Indonesia a major exporter, the country
consistently imports more goods and services than it exports, thus running
a cumulative trade deficit during the five years shown below of $8.0
billion. During the same period, the Indonesian government also paid
a total of $22.8 billion in principal and interest on its foreign debt.
If this additional amount is subtracted from export earnings, the total
shortfall is $30.8 billion over five years. How has Indonesia covered
this deficit? The table makes it clear that the huge deficits during
1995/96 and 1996/97 were covered mostly by large positive net flows
of private capital, much of which was in the form of commercial loans
to corporations. Government borrowing was far too small to cover the
deficits. But notice the major change that occurred once the Asian
crisis hit. Suddenly private capital flowed out rapidly, showing up
in column 6 as net negative flows. At the same time, new borrowing
by the government increased dramatically to cover the gap (including
$10.4 billion from the IMF). Thus for the five-year period in the table,
new borrowing surged to $40.6 billion as net private capital flows ended
up as a negative $2.9 billion. This table captures a significant part
of the story of how Indonesia sank into its current debt trap.

INDONESIA'S
BALANCE OF PAYMENTS

(US$
billions)

GOI

Foreign

New

Net Private

Net

Loan

Exchange

Loans

Capital

Capital

Exports

Imports

Repayments

Deficit

to
GOI

Flows

Position

1

2

3

4

5

6

7

(=
1 + 2 + 3)

(=
4 + 5 + 6)

1995/96

47.8

-54.7

-5.9

-12.8

5.7

11.7

4.6

1996/97

52.0

-60.1

-6.1

-14.2

5.3

13.5

4.6

1997/98

56.1

-57.9

-4.1

-5.9

8.3

-11.8

-9.4

1998/99

48.3

-43.7

-3.7

0.9

16.3

-9.6

7.6

1999/00

40.4

-36.2

-3.0

1.2

5.0

-6.7

-0.5

Totals

244.6

-252.6

-22.8

-30.8

40.6

-2.9

6.9

Notes:

Figures
for fiscal year 1999/00 are first three quarters only.

Exports
include Migas and non-Migas.

Imports
include merchandise and net cost of services.

Net
Loans includes IMF package funds since the third quarter of 1997/98.

Source:

Central
Bank of Indonesia.

With
this overview of Indonesia’s debt crisis in hand, attention now turns
to the question of debt relief, the conditions under which it should
be granted, and some strategies for digging Indonesia out of its debt
crisis and accelerating the country’s economic recovery. We begin with
the important matter of Criminal Debt.

Criminal Debt

The
interaction between borrowers and lenders is complex and involves issues
of trust and power that sometimes reach into the past (when some debts
were first accumulated) as well as into the future (when a borrower
hopes to have continued access to credit on good terms). Being a good
debtor has certain benefits, while being a bad debtor involves certain
risks and costs. The inability to repay debts is viewed very negatively
in international financial circles. Simply
refusing to repay debts is one of the most risky moves an individual
country or government can make. In discussions of problems between
debtors and creditors, it is usually the debtors who are seen as behaving
badly – for instance when they fail or refuse to uphold their side of
binding international loan contracts. This paper attempts to shift
the focus toward a more balanced perspective, where it is recognized
that creditors also engage in direct violations of international laws
and norms. In doing so, the perspective also shifts from a simple opposition
of debtor governments against creditor agencies in favor of a more revealing
optic that positions debtor populations on one side and debtor governments
and creditor agencies operating in collusion on the other.

Indonesia
has several options for reducing its high debt burden. One is to ask
for relief or charity based on poverty and an inability to repay much
of the country’s debt burden. This is a key element of the Jubilee
2000 campaign. Another is to claim that a significant portion of the
public foreign debt is “odious debt,” and thus illegitimate. This tactic
is also partly reflected in the Jubilee 2000 movement, though it goes
beyond mere charity because the principle of odious debt is grounded
in international law and has been applied in a limited number of cases.
A third option is the right to demand debt reduction based on the illegal
behavior of creditors, particularly the multilateral development banks
(MDBs). This paper develops this third option through a discussion
of “criminal debt,” with specific reference to the important Indonesian
case. The final section of the paper examines some of the political
circumstances that are crucial to achieving effective debt cancellation,
as well as some of the conditions that should be imposed by creditors
if they agree to cancel significant portions of debt for countries like
Indonesia.

Every
country has a total stock of public debt. For some governments the
debt is incurred directly through issuing bonds, where the purchasers
of the bonds (creditors) can be foreign or domestic. Some countries
also incur public (“sovereign”) debt by borrowing abroad from commercial
and official (multilateral and bilateral) sources. The World Bank is
one source of foreign official capital.

“Criminal
debt” refers to a repayment burden on a society that is unjust either
because sovereign loans were made to a country and then were stolen
by officials and business cronies, or because debt was incurred to rescue
an economy severely damaged by criminal behavior of powerful actors.7
This is different from sovereign debt where the funds provided to a
government actually get used for their intended purpose. It is also
distinct from government bond debt issued to build schools, pave roads,
or provide services. Criminal debt is public debt on the shoulders
of a society that is directly linked to illegal business activities
or outright appropriation of external loan funds by individuals for
their private enrichment.8 The public never receives any benefit
from these resources.

All
the debt must be repaid by the citizens of the country, the great majority
of whom are poor in developing countries. But the
channels of supply of public debt and the parties involved –
foreign or domestic, private or institutional-official – are extremely
important factors in determining culpability and fiscal liability as
levels of criminal debt accumulate. The reason is that the actors involved
and the power relations among them within the chain of debt supply change
in crucial ways depending on the source of the debt.

The
level of “grand” or “systemic” corruption in a society is related directly
to a country’s internal power relations. Military dictatorships, civilian
authoritarian regimes, and warlord states present citizens with minimal
opportunities for limiting the share of total public debt that ends
up as criminal debt. If a dictator borrows domestically by selling
bonds for highway improvements, and most of the funds end up in accounts
in the Cayman Islands or as a palazzo in Venice, this is an outcome
that reflects power relations within the society. The responsibility
for the theft and the fiscal liability for the resulting criminal debt
burden is wholly between the citizens and their leaders. With a change
in power relations and a change in regime, there may be a day of reckoning
for the officials and military officers who accumulated the
purely domestic component of the country’s total criminal debt.

But
only part of all criminal debt originates wholly from within the national
context. Another part originates from international sources. For this
portion, both the power relations and the burden of legal and fiscal
responsibility are different. It is here that the World Bank enters
the discussion. Just as there is a power relationship between a government
and its people, there is also one between the World Bank and governments
that borrow (or, as the Bank terms them, its “clients”). Debt accumulated
and stolen domestically is a purely domestic concern. But what of debt
accumulated through an institution like the World Bank and systematically
stolen by client governments? This foreign-sourced portion of a country’s
total criminal debt is borne by its citizens even though they never
received the funds and lacked the political power to constrain the kleptocrats
enriching themselves. Clearly this is not a purely domestic matter
between citizens and their leaders.

The
share of criminal debt that originates from sources like the World Bank
merits separate treatment because the Bank not only has
leverage to prevent (or at least greatly diminish) the accumulation
of foreign criminal debt from its own lending, but also a
strong legal mandate in its constitution to do so. If it can
be shown that the Bank was aware that a share of its resources was systematically
being siphoned off as criminal debt, and if it can further be shown
that the Bank failed to fulfill its legal mandate to prevent the loss
of its loan funds, then according to international law the Bank shares
culpability and also must bear some of the fiscal burden for funds transferred
and lost. Unlike calls for debt reduction based on charity and compassion,
such as Jubilee 2000, demands by indebted populations in Asia, Africa,
and Latin America for the World Bank and other MDBs to absorb their
fair share of the costs of the criminal debt problem are a
right grounded in international law. In the case of Indonesia,
for instance, World Bank loans to the corrupt Suharto government totaled
about $30 billion between 1966 and 1998. According to the best estimates
currently available, approximately a third of this, or $10 billion,
was systematically stolen with the Bank’s full knowledge and thus is
criminal debt. With the fall of Suharto, ordinary Indonesians through
their newly elected government have a legal right to demand that the
Bank absorb a fair share of this $10 billion in criminal debt.

Legal Responsibilities of
the World Bank

The
Articles of Agreement represent the founding charter of the World Bank,
setting forth the Bank’s purpose, membership, operations, rights, limitations,
and responsibilities. It is a binding Constitution subject to all the
rules and norms of international law. For purposes of the present discussion
of corruption and accountability, the most relevant part of the charter
is Article III, Section 5, Paragraph (c), which states: “The Bank shall
make arrangements to ensure that the proceeds of any loan are used only
for the purposes for which the loan was granted, with due attention
to considerations of economy and efficiency and without regard to political
or other non-economic influences or considerations” (p. 4). This clause
was included in the Bank’s constitution to protect loan funds from being
stolen or misused. It places a clear burden and responsibility on the
Bank to make arrangements that ensure its funds are not corrupted, and
it admonishes the Bank to carry out this function in a manner that is
economical, efficient, and unbiased.

The
legal implications of this Article are profound. The Bank’s charter
is silent on what fiscal burden the Bank must bear if it fails to fulfill
this fiduciary responsibility and a share of its lending become a significant
part of a borrower’s criminal debt burden. But it is obvious that the
World Bank is a recognized legal entity under international law and
faces legal procedures that range from internal grievance hearings,
through international mediation, and end with the jurisdiction of the
International Court of Justice (the World Court).9
To date, no suit to demand relief of criminal debt linked to Bank loans
has ever been brought by a client government that has replaced a kleptocratic
dictatorship, nor have any class action suits been brought by aggrieved
citizens or Non-Governmental Organizations (NGOs). This remains an
untested area of international law.

The
legal position of the MDBs, including the World Bank, regarding challenges
to loan repayment has been most extensively examined by John W. Head,
whose scholarly work builds on the writings of Aron Broches, who was
the General Counsel of the World Bank in the 1950s and 1960s.10
Head writes that any controversy between the World Bank and borrowers
shall be submitted to arbitration by an Arbitral Tribunal. A three-person
arbitral tribunal is set up to hear the dispute in accordance with procedures
it establishes. The tribunal then renders a decision that is enforceable
in national courts. Head writes that “the instituting party is to notify
the responding party of the claim being made, the relief being sought,
and the name of the arbitrator is has appointed. Within 30 days after
such notification, the responding party is to name the arbitrator it
has appointed.”11 The two sides are then supposed to
agree on a third arbitrator (called an “umpire”). If they have not
agreed on this third person within 60 days of the initial notification
by the instituting party, the umpire will be appointed by the President
of the International Court of Justice or the Secretary General of the
United Nations.

An
important consideration in any discussion of the World Bank’s legal
responsibility for stolen funds is the seriousness with which the Bank
has interpreted its mandate to “ensure” that its funds are not diverted
or stolen. What “arrangements” have been made, how strongly were they
enforced, and can the Bank demonstrate concrete results through a declining
pattern of corruption in the projects it funds? Here it is relevant
not just to look at the procedures the Bank has on paper, but also what
is done in practice in the field and the results these practices yield.12
What does Bank do to guard its funds generally, and what was done specifically
in the Indonesian case?

Appendix
I at the end of this paper looks in detail at World Bank project supervision
in theory and in practice. It presents abundant evidence that corruption
of Bank funds was not taken seriously at the Bank until very recently,
that project supervision (particularly of financial aspects) has been
extremely poor, and that strong attitudes still persist at the Bank
at the most senior levels that corruption of development funds is inevitable
and that such matters do not deserve a high priority. There does not
appear to be much concern among Bank officials that the institution
will have to bear part of the financial responsibility for lost loan
funds, despite the clear legal provisions in the Articles of Agreement.

The
United States Congress was so alarmed by the World Bank’s failures to
make arrangements to ensure that loan funds were used for their intended
purpose that it made a formal request for an investigation by the General
Accounting Office (GAO). The GAO published its findings in a devastating
report in April 2000 entitled “Management Controls Stronger, But Challenges
in Fighting Corruption Remain.” It was taken as obvious that the Bank’s
previous “arrangements” to safeguard loans were weak. The objective
of the GAO investigation was to determine if new efforts on the part
of the Bank since 1995 were effective. While noting some progress,
the GAO found that “challenges remain and further action will be required
before the Bank can provide reasonable assurance that project funds
are spent according to the Bank’s guidelines” (p. 5). The GAO also
concluded that “the Bank and some borrowers do not always comply with
Bank procedures on project auditing and Bank supervision of borrowers’
procurement and financial management practices” (p. 6). The investigators
report that “Bank studies on the quality of Bank supervision do not
fully address key performance problems reported by external and internal
auditors” (p. 6). Finally, the GAO found that the Bank “does not publicly
report progress in implementing management control improvements” (p.
6-7).

It
is apparent from the GAO’s research that Bank officials and staff were
aware that their loan supervision was poor. This passage from the GAO
report is particularly revealing:

Although the Bank has long
had an internal audit function and a system of management controls,
the Bank recognized that its internal oversight mechanisms were weak,
according to several officials we spoke to. These officials indicated
that the Bank lacked a central focal point for reporting and reviewing
allegations of wrongdoing and sufficient expertise to investigate allegations
of wrongdoing. In addition, while the Bank expected its staff to exhibit
strong ethical behavior, the Bank did not have a strong ethics awareness
program. The Bank’s external auditor reported in 1998 that the Bank’s
internal audit department – a key management oversight unit – had a
fairly restricted scope of audit coverage and played a limited role
within the Bank. For example, about 78 percent of the 206 internal
audit reports conducted from fiscal years 1995 through 1997 were focused
on administrative compliance issues, such as country mission office
procedures, rather than on determining whether project funds were being
used as intended.13

When the GAO report was finished,
Senator Mitch McConnell, who had requested the investigation, released
a letter criticizing the past practices of the Bank and its slow progress
in correcting the most serious problems that lead to criminal debt.
Among the problems with the Bank’s efforts at reform, Senator McConnell
wrote that “new initiatives introduced [by the Bank] in 1998 to improve
financial and procurement procedures only apply to 14% of the Bank’s
1,500 projects. In recent audits, 17 of 25 borrowers showed a lack
of understanding or noncompliance with procurement rules. GAO’s review
of 12 randomly selected projects identified 5 projects where the borrowing
countries implementing agencies had little or no experience managing
projects.” He added that “GAO determined that solving [corruption]
problems is made more difficult because audits are often late and of
poor quality, and the Bank does not evaluate the quality of audits.”

Senator
McConnell also raised the problem of corruption in Indonesia, particularly
his “concern about flagrant abuses which compromised the World Bank’s
program in Indonesia.” According to the senator, “The Bank’s Country
Director [Dennis DeTray] ignored internal reports detailing program
kickbacks, skimming and fraud because he was unwilling to upset the
Suharto family and their cronies whom he believed were responsible for
Indonesia’s economic boom.”14

The Indonesian Case

Indonesia
has the potential to be a test case for discovering if legal challenges
are a viable channel through which to win relief of high levels of criminal
debt accumulated through Bank projects and to influence the Bank to
more quickly bring its project supervision in line with Article III.
The government responsible for stealing public funds has been pushed
out and a legitimate democratic government is in power.15
The Indonesians can also show that Bank funds were systematically stolen
and that the Bank or the governments controlling the Bank were aware
of the rampant corruption pervading the Indonesian state. Indonesians
are potentially well positioned to plead at the International Court
of Justice that they are burdened by a staggering level of criminal
debt that accumulated in part because the Bank violated Article III
and negligently loaned billions to the Suharto regime despite their
knowledge not just of corruption throughout the system, but also of
corruption within their own project portfolio.

The
World Bank has tried to evade responsibility for and knowledge of corruption
in their project in Indonesia. But their defense is weak. In their
history of the Bank, based on access to tens of thousands of internal
documents and files, Kapur et. al. write that with regard to an early
awareness of corruption in the Suharto government, “the Bank clearly
had this issue in view from the beginning of its (1968) renewed relationship
with the country. But the relevant documents convey little sense that
the phenomenon had to or could be fully eradicated. Indeed, McNamara
himself did not warm to the issue until late in his tenure, at which
time he became quite vociferous.” The authors continue:

In his final presidential
visit [in 1979] he gave almost the same message verbatim to assembled
ministers then to Vice President Malik, and finally to President Suharto,
face to face. McNamara explained that “it was also necessary to maintain
the emphasis on reducing corruption. Outside Indonesia, this was much
talked about and the world had the impression, rightly or wrongly, that
it was greater in Indonesia than in any but perhaps one other country….
It was like a cancer eating away at the society.”16

There is no hint that this
lecture from McNamara resulted in any tightening of Bank supervision
of projects in Indonesia. Indeed, although his plan was not adopted,
the Bank’s resident director proposed moving away from projects and
providing Indonesia with large sector loans that would leave control
over disbursement entirely to a government the Bank’s own top management
viewed as among the most corrupt on the planet. Perhaps recognizing
that McNamara was unlikely to shift the Bank’s posture toward Indonesia,
President Suharto “is recorded as making no trace of a response to the
demarche on corruption.”17 Suharto certainly recognized that
his country had a uniquely close relationship with the Bank and McNamara
– “Indonesia was the presidentially designated jewel in the Bank’s operational
crown.”18 At a minimum, it is apparent that
there was an early appreciation in the World Bank of the ruinous levels
of corruption being perpetrated in Indonesia under Suharto’s military-backed
rule.

It
would not be until the late 1990s that the corruption issue would erupt
into full public view in Indonesia. At the end of July 1997, the World
Bank’s country director, Dennis de Tray, and the vice president for
East Asia and the Pacific region, Jean-Michel Severino, issued an angry
press release denying that roughly a third of the Bank’s loans to Indonesia
routinely leaked into the hands of corrupt officials in the Indonesian
government. They were responding directly to a press conference in
Jakarta at which it was claimed that the conventional wisdom inside
the Bank, both in Indonesia and among Indonesia hands in Washington,
was that such levels of corruption were common. The angry press release
from the Bank characterized the statements made in the press conference
as dishonest, saying they had “misrepresented” the Bank’s work on behalf
of Indonesia’s poor. Severino said that the Bank had checked the accusations
and had “found nothing to support such an estimate” of corruption of
Bank funds. The estimates had, however, been based on interviews with
Bank officials both in Jakarta and the U.S. spanning the period 1990
through 1997. The Bank’s denial, carried on newswires around the globe,
said the accusations were “demonstrably untrue” and that the Bank’s
staff “know exactly” where all the loan money goes. It added: “We do
not tolerate corruption in our programs. On this principle there is
no compromise.”19

Even
as these misleading statements were being distributed, Bank staff in
Jakarta were at work on a secret document that would not be leaked until
nearly a year later. Entitled “Summary of RSI Staff Views Regarding
the Problem of ‘Leakage’ from World Bank Project Budgets,” and dated
August 1997, the document presents what it terms an “operational overview”
of the corruption problem in Bank projects in Indonesia.20
The document opens with this “unequivocal statement of fact”:

Documentation of procurement,
implementation, disbursement and audits for Bank-financed projects are
generally complete and conform to all Bank requirements; we have moved
aggressively to resolve each and every irregularity for which we have
documents (as well as many cases of preventive action and informal corrections
of problems).

This declaration is followed
immediately by a direct admission that in Indonesia the Bank had not
made arrangements that ensured that the funds it loaned were used for
their intended purpose:

In aggregate we estimate
that at least 20-30% of GOI [government of Indonesia] development budget
funds are diverted through informal payments to GOI staff and politicians,
and there is no basis to claim a smaller “leakage” for Bank projects
as our controls have little practical effect on the methods generally
used. [My emphasis]

Among other things, the document
makes the following points:

a) that some officials
were expected to pay bribes in order to be placed in “wet” (lucrative)
positions in the bureaucracy linked to development projects.

b) that leakage pressures
increased during the two years leading up to the 1997 national elections,
and that Suharto’s political party machine, GOLKAR, was the culprit
behind the additional squeeze on the system.

c) audits by government
officials at the ministerial and provincial levels are designed mainly
to find issues or “mistakes” in project implementation, which can then
be fixed or ignored for a fee ranging up to 10% of the project value.

d) corruption across Indonesian
government ministries is not uniform, in the experience of Bank staff,
and ranges from relatively low (less than 15%, although on very large
loans) in the Ministry of Health and the Ministry of Mines and Energy;
moderate (15-25%) in eight ministries, including agriculture, education,
public works, and religious affairs; and high (over 25%) in an additional
four ministries, including forestry and home affairs.

Over
the course of the New Order, the Bank loaned Indonesia roughly $30 billion.
If a consensus figure is that a third was stolen, then Indonesia’s criminal
debt linked to World Bank sources is roughly $10 billion. During the
military dictatorship of Suharto, Indonesian citizens were extremely
limited in their abilities to expose and stop corruption by government
officials from Suharto down through the bureaucracy. The same cannot
be said for the Bank. If it had the commitment to fulfill its fiduciary
mandate in Article III, it could have raised the corruption problem
as a matter that by law the Bank could not tolerate. It could have
taken a variety of measures, including intensifying the supervision
of its projects, thereby reducing the levels of corruption in its own
operations, even if it could not stop the rampant corruption across
the government. It could have threatened to gradually reduce its lending
to Indonesia over a period of years if the leakage of Bank project funds
was not progressively curtailed. It could have halted lending completely
on the grounds that continued lending under circumstances of persistently
high levels of theft violated the Bank’s fiduciary mandate contained
in its charter.

In
an article published in Indonesia’s main English language daily, the
Jakarta Post, the Bank’s resident director attempted to deny
any Bank responsibility for Indonesia’s criminal debt burden by shifting
all the responsibility to the Indonesian side. He invokes the Bank’s
notion of “ownership” of projects – a concept designed to get governments
to embrace Bank projects more thoroughly in the partnership between
the Bank and borrowers.

The development projects
and reform programs the Bank finances do not belong to us: they are
owned by the government. It is the government that is responsible for
ensuring that the money it borrows is spent for the purposes intended
and that it is protected from leakage through bribery and corruption.
This is not to say that we take no action ourselves in this regard.
We have always audited, reviewed and monitored our projects to try to
safeguard them. We have the strongest and strictest procedures of any
development institution. We are continuously seeking ways of strengthening
our controls.

The idea that a client state
should “own” Bank projects makes perfect sense from the perspective
of augmenting a government’s commitment to the project. On my reading,
however, this notion of ownership never appears in the Articles of Agreement.
And it is fair to ask if such a development approach can legally nullify
Article III’s mandate on fiduciary responsibility.

The
evidence is abundant that the Bank knew Indonesia was seriously corrupt
as far back as the late 1960s. Moreover, the Bank’s resident staff
in Jakarta argued in their confidential 1997 assessment that although
Bank procedures were followed, the procedures did not put a dent in
the accumulation of criminal debt burden on Indonesian society from
Bank operations. A clear legal potential exists the new democratic
government in Indonesia to sue for relief of part or all of the $10
billion in criminal debt that accrued to the Indonesian population on
the grounds that they never received the funds and the Bank continued
to supply new loans over three decades despite full knowledge that a
significant share of the funds was being stolen.

What
are the prospects for forcing the Bank to act legally and responsibly?
When the new Indonesian government was installed in October of 1999,
it was immediately apparent that Indonesia’s relations with the IMF
and World Bank would have to be mended. Both institutions had suspended
their fund transfers to Indonesia because of the Bank Bali scandal (IMF
money) and because of the East Timor brutality in the summer of 1999.
The economic situation in Indonesia remained dire, and there was an
almost six percent shortfall for the national budget. The gap would
have to be filled through the Consultative Group on Indonesia, chaired
by the World Bank. The structural power of a capital controller like
the Bank in such circumstances is enormous. Not surprisingly, there
has not been one word uttered from the new government about the lost
$10 billion. Indeed, during their first six months in office, Indonesia’s
top economic ministers went out of their way to reassure the Bank and
the IMF that Indonesia will only ask for debt rescheduling, not write-offs.
As pressure mounted and Indonesia’s top economic minister finally raised
the matter of debt reduction, the results were disappointing. According
the Kwik Kian Gie, the Coordinating Minister for the Economy, “I have
tried several times [to get debt relief] but I got only a scolding from
the IMF, the World Bank, and the ADB. They even threatened to stop
dealing with Indonesia.” The minister added: “We could not go against
[the] IMF as in fact we still need their assistance. If the IMF decides
they are through with us we would not get assistance from other international
agencies. We would be lucky if we could get loans bilaterally.”21

It
is evident that the only way to prevent the World Bank from avoiding
its responsibilities for helping create a huge criminal debt burden
for Indonesia’s poor is through popular political action aimed at the
Bank and at the new government itself. Demonstrations, lobbying, and
protests would have the potential of opening up a political space in
which Indonesian officials could turn to the Bank and claim that for
reasons of domestic political stability, there must be some relief.
There are signs that pressure is beginning, though it still is at too
low a level to have an impact. In January 2000, a thousand demonstrators
gathered outside the World Bank mission in Jakarta demanding relief
for stolen debt. When World Bank President Wolfensohn visited Indonesia
in February of 2000, he was met with angry protests and had his minivan
pelted with rotten eggs. An important difference between the structural
power of private capital and that of the World Bank is that it is, in
market and legal terms, completely legitimate for private investors
to withdraw or withhold their capital when they find an investment climate
unresponsive or hostile to their interests. But the same cannot be
said of the World Bank, which is an international body subject to the
norms and principles of international law and its own charter. It is
very difficult to end the impunity of private capital for their economic
crimes, but with a strong domestic movement in Indonesia and a solid
legal team, the impunity of the World Bank could be reversed through
proper legal channels.

A Postscript on the Conditions
on Debt Relief

It
would be a mistake to push for debt relief and not take into consideration
what is done with the funds that are saved. The purpose of debt relief
is not to benefit the government, the military, the rich, or some abstraction
called “the nation.” The purpose is to improve the conditions of the
many poor living in developing countries. Thus it is important to assess,
for example, whether funds from debt relief might themselves be stolen
by the new government. Although the elimination of collusion, corruption,
and nepotism is an important objective of Indonesia’s new government,
evidence available both publicly and privately indicates that KKN is
still pervasive in the Indonesian system.

This
suggests that safeguards for any debt relief funds must be put in place.
Moreover, both the World Bank and Indonesian NGOs should demand as a
condition of debt relief that the freed resources be tied to specific
programs and budget increases – for example, for education and health
care. Likewise, increases in military budgets should not rise faster
than overall increases in tax revenues to prevent savings from debt
relief being diverted to military spending. Debt relief should also
be tied to specific reforms by both the Indonesian government and the
MDBs that will prevent repeating the same criminal debt problem in the
future. The struggle for debt relief represents a moment of potential
leverage not only to reduce the drain on the economy and country, but
also to bring changes that will have an impact far into the future.

APPENDIX I

Project
Supervision in Theory and in Practice

Project Supervision on Paper

The
Bank produces a tremendous volume of booklets and procedures associated
with its operations (and even more in its research and public relations
divisions). One key booklet is titled “The Project Cycle,”22
which sets forth the six stages of a Bank project, from “Identification”
through “Negotiation and Board Approval,” and finishing with “Evaluation”
once the project is completed. The penultimate stage is “Implementation
and Supervision,” which the booklet describes as the “least glamorous
part of project work,” though it admits that it is “the most important”
(p. 7).

Troubling
issues arise even in the description of the implementation and supervision
stage, much less in actual practice. “Once a loan for a particular
project is signed,” the document says, “attention in the borrowing country
[and, the evidence will show, at the Bank itself] shifts to new projects
that are coming along.” It adds that “this attitude is understandable”
(p. 7). Turning to the question of fiduciary responsibilities, the
document is surprisingly cavalier in downplaying the watchdog role of
the Bank:

The Bank is required by
its Articles of Agreement to make arrangements to “ensure that the proceeds
of any loan are used only for the purposes for which the loan was granted.”
While this “watchdog” function has been and remains important, the main
purpose of supervision is to help ensure that projects achieve their
development objectives and, in particular, to work with the borrowers
in identifying and dealing with problems that arise during implementation
(p. 8).

In a document reproduced by
the tens of thousands and circulated to every development ministry in
every client country of the Bank around the world, lip service is paid
here to project supervision in general and to fiscal accountability
of loans in particular. At the level of signals the Bank sends on paper,
such “while this” clauses send a clear message that the Bank’s commitment
to following the money is half-hearted at best.

A
fair response from the Bank would be that the project cycle document
was last revised in 1982 and the Bank’s position on supervision, and
particularly its culture and seriousness about corruption, has changed
dramatically in recent years. But in an interview in April 1999 with
two senior Bank officials who knew I was writing on corruption (and
who were specifically designated to discuss the Bank’s current views
and practices with me) it was apparent that the position had not changed.
“We look more than anything else at what the project achieves,” one
official said, “not really the money. We look, for instance, at whether
schools get built, not how the money was spent to build them.” The
other official went even further, making direct reference to the estimate
that a third of the Bank’s funds loaned to Indonesia was stolen and
became criminal debt. “If you take the amount of 30 percent loss,”
said the official, “it means 70 cents [on the dollar] got used for development
after all. That’s a lot better than some places with only 10 cents
on the dollar.”23

The
Bank produced its first systematic framework for addressing corruption
only in 1997.24 Entitled “Helping Countries Combat
Corruption: The Role of the World Bank,” the document admits that the
Bank “should address corruption more explicitly than in the past,” adding
that the Bank was “often reluctant to confront corruption openly because
of the issue’s political sensitivity and
the lack of demand from borrowers for assistance in this area.”
[My emphasis]. The document further notes that in the Bank’s “vast
store of country reports” and its many thousands of economic and sector
studies accumulated over decades of studying, analyzing, working deeply
within blatant kleptocracies, the subject of corruption is almost never
addressed directly, but “can be inferred (even if the term is seldom
used).” Were the Bank to find itself in court attempting to defend
its record of due diligence with regard to Article III and its fiduciary
responsibilities, the documentary evidence would, by the Bank’s own
admission, provide a weak basis. The unwillingness even to utter the
word “corruption” before 1996, opting instead for obsfucating terms
like “rent-seeking” (which 99% of the planet’s population would interpret
as “seeking to rent something”), demonstrates a profound reluctance
on the part of the Bank not only at the level of concrete action, but
even at the level of discourse.

Project Supervision in Practice

The
1997 framework on corruption states that preventing fraud and corruption
in Bank-financed projects is one of four levels at which the Bank is
now combating corruption. Although this element is crowded out by the
much larger discussion of the Banks plans for new projects and lending
to fight corruption, it is worth discussing actual project supervision
for two reasons: first, to assess whether changes proposed in the framework
or announced by the Bank will be effective, and second, to gauge the
vulnerability of the Bank to legal action. It is not difficult to demonstrate
that the fiduciary mandates in the Articles of Agreement were seriously
neglected in the Bank’s voluminous paper trail – whether in its reports
or in its procedure booklets. But a much more important indicator of
Bank culpability or innocence on the charge of collusion in allowing
criminal debt to accumulate in its own operations is in the routine
supervision practices on the ground and in the field. Even if the procedures
on paper were carried out to the letter in practice, were the safeguards
adequate and did they meet the standards of the mandate in the Articles?
In the parlance of development specialists, who speak of a “results
orientation,” can the Bank point to concrete results in the form of
evidence of a low or declining rate of theft of the resources it loaned?

This
review of past and current project supervision procedures draws on the
author’s extensive field research on the Indonesian case, and numerous
confidential interviews with Bank officials in Jakarta and Washington
beginning in January 1990 and ending in April 1999. The most recent
interviews were with Bank staff that worked on more than one hundred
projects in several African countries. The interviews and field visits
are supplemented by documentation and reports, some of which were leaked
by Bank staff frustrated by what they describe as a dominant culture
of indifference to corruption and eager to accelerate the pace of reforms.
Pushing the pace of reforms has included revealing internal information
that is potentially quite damaging to the Bank’s reputation and undermines
its denials of culpability for the accumulation of criminal debt (and
by extension supports its fiscal liability to absorb some portion of
the losses represented by criminal debt).

This
section will make liberal use of quotes from Bank staff with extensive
experience in Bank operations, project supervision and implementation,
and internal efforts to challenge the culture of indifference on corruption
inside the Bank. It should be noted up front that these internal sources
see a mixed picture in the Bank at the moment. On the one hand, the
problem of corruption is receiving more attention now than at any time
in the Bank’s history. But on the other hand, supervision budgets are
smaller for projects while new schemes are being hatched to facilitate
disbursing money faster to client countries. The intense pressure to
disburse loans conflicts not only with project quality, but also with
any efforts to ensure that funds get used for their intended purpose.

The
supervision of projects consists of many components. For fiscal purposes,
the most widely-used instrument for the Bank is audits. “We insist
that all projects are audited by accredited agencies in the countries
concerned,” a senior Bank official pointed out when pressed on whether
the Bank was fulfilling its fiduciary mandate set forth in Article III.25
The fact that the Bank requires audits by accredited agencies certainly
signals that the institution is both serious about and effective in
meeting the fiduciary mandate of its charter. But what counts is not
procedures on the books or hoops jumped through. What matters is what
actually happens on the ground and whether those activities constitute
effective arrangements to ensure that Bank funds get used for their
intended purpose.

The
people in the Bank who know the most about this are its “task managers,”
the individuals who oversee more closely than anyone else the design,
implementation, supervision, and evaluation of Bank projects. Starting
with procurements, it happens that all task managers are required to
fill out Form 384 for all procurements over a certain threshold. Although
potentially a useful instrument for accountants to follow the money
in a project, in fact these forms have another purpose. According an
individual with extensive project experience:

There are certain levels
of procurement, and if you go above certain levels, you have to fill
this form out. It involves certain procedures, bidding procedures,
competitive aspects of the process, and so on. I always thought this
384 was primarily for us [the Bank, project managers]. I came to find
out that basically it's a form for reporting to the EDs [executive directors]
so that they know how much business is coming or going through their
countries. Because I would say, "well you know this [384] form
isn't filled out..." and they [the speaker’s superiors] would say
"well that's ok, it's really just for the EDs." And here
I thought we were using it as more of a management tool. But it was
really to help the EDs report back about what they were getting, where
it was going, etc.26

Although Bank officials regularly
state that effective systems of financial management and documentation
are in place and functioning, current and former task managers who watch
billions of dollars disappear tell a very different story. On how well
project expenditures are documented, a seasoned task manager explained
the situation this way:

They’re documented in a
very weak way. There's so much of it where we just don't know. We're
trying to make progress [in following the money], and it's happening
now. It never happened before, with some rare exceptions. It is happening,
but it's a long way from achieving critical mass [as a standard Bank
mode of operation] in terms of being able to step back and say "we've
got a reasonably tight program here, we're on top of it."

In response to senior management’s
assurances that reliable audits are conducted, this individual disagreed:

They've always had that
[local accredited audits]. But the big pressure for the longest time,
and it still exists to a large degree, is [that] the audit has to be
done on time. But the quality of the audit? Whether they do anything
about it afterwards? That for a long time was irrelevant. The only
thing that came up on the radar screen [in the project management process
or cycle] was “the audit hasn't been submitted, the audit's overdue.”
That would come up. In many cases, you get an audit in – and this was
the past, and I'm sure they've cut down the time lag on it – in many
cases the audit would come in a year and a half, sometimes two years,
after the fiscal year in question. It's too damn late – because whatever
was wrong, forget it.

The real opportunity for an
auditor to call attention to serious irregularities in a project is
not through the standard boiler-plate numeric report, but through what
the Bank calls a “management letter.” A task manager with extensive
project experience explained:

Even assuming the audit
points to serious errors, in many cases they don't submit “management
letters,” which are basically, apart from the number crunching, letters
that gives the auditor’s opinion on the fiscal management of the project.
Either you don't get them [the letters], or if you do get them you don't
pay attention. The auditors themselves – and I've talked to a number
of them – they admit freely that all they do is look at the books.
If the books balance, they say “we've looked at it according to international
auditing standards, and we find that the records are in order.” But
the records themselves could be fraudulent. Auditors will tell you
it's not their job.

Apart from these routine and
arguably ineffectual audits, there is a stronger weapon in the task
manager’s supervision arsenal known as a post-procurement audit.

[T]hat's when you bring
in what we call a post-procurement audit, and you actually go out and
check [the validity of invoices]. Typically, “you bought three hundred
air conditioners? Where are they?” You look at a couple. “There's
three in this building? Let me see them.” Check the price. This is
a class A air conditioner and you were billed for a class B air conditioner
at twice the price – you know, whatever it is, you go out and check.
So the [routine] audits don't tell you a thing. In fact, I can tell
you from my own personal experience that in many cases, really good
book keeping where the records are impeccable, you found flagrant fraud
being committed. The books are beautiful. The weird thing is why the
corrupt borrowers don't make a better effort to produce a really good
set of books, because that wows everyone. "You want something?"
Bing, you can access it. "Oh this contract? Here are the records
on it. Here's the contract." You got the whole thing. And I've
gone in, it's all there, but it's all fraud.27

Thus it is fair to ask, has
the Bank reasonably satisfied its Article III mandate if it claims that
it conducted routine annual assessments of project books by accredited
auditors? According to a task manager who worked on more than a hundred
projects in Africa, such claims fall short.

You've got to go beyond
what's on paper. It's only paper. We've had cases when we go out in
the field. You go to the [project] accounting office and you ask for
documents. "Oh we don't have them. They're over at the ministry.
They're somewhere else. We'll have them for you next week." I
swear to God, some guy sits up all night writing up invoices. You can
see, it's the same handwriting. Fifty different suppliers and it's
all the same handwriting. And sometimes they're so saturated with writing
that they put the same thing down on five different invoices without
knowing it or picking it up. And it goes through the system. And then
our guys [back at Bank headquarters] look at it and don't even pick
it up.

The accredited auditors conduct
narrow assessments that are almost pro forma and which do not detect
fraud that ranges from the subtle to the blatant. The task manager
concludes: “And so, money gone. In the accounting sense, everything
is fine.” In direct response to the assurances from senior management
that responsible audits were being conducted on projects, this individual
added, “But you have to keep in mind, if they said they're doing post-procurement
audits, fine. If they're doing a spot audit of the books, it's next
to useless. […] The whole thing is a farce. If somebody tells me
a project has been audited, I say, ‘So what? Let me see the audit.’”28

One
argument worthy of careful consideration is that tighter supervision
is expensive, and that reaching a high degree of certainty that Bank
funds are not being stolen could be even more costly to the Bank and
its clients than the resources currently being lost. “You’re always
balancing efficiency against stopping leakage,” a senior Bank official
points out.29 Article III explicitly requires that
in carrying out its fiduciary responsibilities on projects that the
Bank give serious consideration to matters of economy and efficiency.
Is it really feasible to conduct post-procurement audits more aggressively,
to price air-conditioners, or to absorb and follow up on management
letters from auditors that raise troubling patterns of corruption?
The 1997 framework document explains:

The extent to which the
Bank can check statements of expenditure is constrained by several factors.
At headquarters it is often difficult to match items claimed for reimbursement
with line items in the project accounts and to determine whether the
items are eligible for Bank financing. Moreover, Bank staff conducting
supervision missions carry out only limited on-site reviews of documentation
due to claims on their time for resolving other project management and
implementation problems. (24)30

The number of transactions
involved is not small.

The stocks of IBRD and
IDA projects currently disbursing are $88.4 billion and $42.5 billion,
respectively, against an annual flow of new loan approvals of $14.5
billion and $6.9 billion, respectively, in FY96. This stock of projects
collectively generates about 40,000 individual procurement contracts
annually, of which 10,000 (60 percent of value) are conducted under
international competitive bidding rules, and 20,000 (30 percent of value)
are conducted under local bidding rules. About 10,000 contracts undergo
prior review by Bank staff (60 percent of value). The remainder are
subject to what is termed “post-audit” selective checking after the
event to verify that procurement followed the procedures specified in
loan documents. (24)31

It is not clear whether in
claiming the remaining 30,000 contracts are “subject to” post-audit
selective checking that the Bank means that the audits are actually
carried out, or that the contracts are simply eligible for such oversight.
A source who worked for years as a task manager argues that post-audits
are, in fact, rarely carried out.

In a post-procurement check,
you take a transaction from A to Z. How can we, a banking institution,
claiming to be the financial partners in an operation, and having the
right of supervising the project in the physical sense, how can we go
out there in a two-week supervision mission and not spend a day with
the accountant? I can assure you, it does not happen. It is only the
rare occasion that it does.32

On the trade-off between cost
and effectiveness, the former task manager agreed that one needs to
be realistic. “There's no question that any institution is going to
have inefficiency and money stolen,” he said. “The point is, do you
just sit back and say ‘oh it's all right,’ or do you make the best effort
to contain it?” As a practical matter, he argued that the key was to
target the worst cases to set a tone: “You take the most egregious cases
and you deal with it.” He continued:

I always like to point
out, you've got speed limit signs on the highway, and these represent
all the safeguards on paper that Bank people talk about putting in place.
But if you don't have a cop behind a billboard every so often, and if
they don't see someone pulled over every so often, then people don't
obey the speed laws.

He drew an additional parallel
to the Internal Revenue Service in the United States. Tax payment is
the U.S. is similar to local Bank project management in that both involve
self reporting. The I.R.S. enforces honest reporting by in-depth and
aggressive audits of only 1 to 3 percent of all corporate and individual
tax payers. There are cash penalties for errors and jail penalties
for fraud. Although the actual risk of being audited is low, many tax
payers fear they will be caught if they cheat. The issue is not whether
a large number of audits is conducted, but that tax payers know there
is a real chance their fraud will be detected and that there will be
real and even serious consequences for committing fraud. It is this
concern with being caught or paying a price that is most lacking in
the Bank’s approach.

Many
task managers at the Bank complain that in many instances corruption
is so pervasive in Bank projects that after decades of developmental
effort in which corruption is tolerated, there are very few positive
results that can be shown from the lending and projects. One task manager
with more than a decade of experience on projects across a variety of
sectors and in numerous countries rejected the claim by the senior Bank
official (quoted above) that while a 30 percent loss to corruption is
a problem, there is still a significant and positive impact from the
other 70 percent:

That’s the old argument,
isn’t it? They’ve been saying that for years. […] There are a couple
fallacies there, and it is much too cavalier an attitude. That's because,
in fact, my experience has been – and it's the experience of a lot of
other people there [on the operations side of the Bank] – if they're
busy stealing 30 percent, they're not paying any real attention to the
other 70, even assuming 30 percent is all they're taking. What you're
really doing is really ruining the whole effectiveness of the investment
itself. I try to tell people […] it's like giving the money to buy
a car but they're stealing the money that would buy the gasoline. So
what good is the car? It is a fact, I can demonstrate it, and I'll
stand by it. I'll prove it anytime.

She offered the following example:

You cut corners and nobody
cares. If you let out a contract for $2 million, and you get the few
civil servants at the top sharing $600,000 or 30 percent, do they care
if the contractor puts in concrete that is just sand and water? Do
they care if the contractor doesn't put reinforcing steel in the structures?
They don't care. So when Bank people say we're at least getting 70
cents of good development on the dollar, no you don't. Because the
contractor either has to make back the money that he's kicked back,
or he just figures, “hey, it's open season, I do what I want and no
one is going to challenge me.” And so you have this feeding frenzy,
and the end result is you get very little development.33

Putting aside who is fiscally
responsible to repay the lost 30 percent, she questioned what genuine
value a country or the poor really get from projects conducted in ways
where such levels of theft are tolerated.

If you get only one dollar
out of ten that goes to the poor, is that really worth it? And have
you done anything to strengthen the economy for the long term? No.
You've only nourished a corrupt government that has no intention of
providing services. To me, those arguments are hollow.

She points to a startling pattern
in the African projects the Bank funded for decades, and in which she
participated directly as a task manager.

All you have to do in the
case of Africa is travel the length of the continent and see how many
derelict projects, buildings rotting, infrastructure rotting because
we financed it. […] I can't remember one project in Nigeria, out of
all the ones I worked on, that you could look back and say, "Well,
hey, we did a good job" – we, us and the Nigerians.

As of the mid-1990s, she explained,
the Bank had done about 2,200 projects in sub-Saharan Africa, with nearly
all of them being seriously undermined by the lack of Bank supervision.

Ask anybody to tell you
how many they can think of that really succeeded out of 2,200 projects.
Even when you take out the calamities, the drought that has destroyed
or hindered progress, or you take out the civil wars. Even when you
take all those other factors out, you've still got an awful lot of things
that have been done that have gotten nowhere. The money is spent and
the debt is incurred. Is the infrastructure there? No. Is it being
maintained? No. It's just an endless parade of failure.

She is cautiously optimistic
about recent signs of progress.

It is happening but it
has yet to change the culture of the Bank to a considerable extent.
I do see beginnings of it. People are using the word “fraud” in meetings.
It’s cropping up in memos on the operations side. I’m not talking about
the PR side of the anti-corruption battle, where we have our EDI [Economic
Development Institute] going out and conducting workshops, where they're
training journalists how to expose corruption, or what to look for and
how to deal with it in the press. These are all very positive things.

But she adds that too often
the Bank adjusts to criticisms and problems more with public relations
campaigns than with substance.

The thing that troubles
me a lot is the Bank's way of dealing with issues – and I think this
is still a major part of the Bank's culture – is reorganize, shuffle
around, change the names, do anything but actually deal with the issues.
There's all this appearance – and appearances are everything – that
we're doing something when in fact you see in a number of instances
where not only are we not doing anything, but we're going backwards.
I'm sure a lot of people would challenge me on that, but I don't think
that their challenges would stand up.

At root, according to one task
manager, the obstacles to dealing effectively with corruption today
are the same ones identified in the Wapenhans Report in the early 1990s.
The most important problem is the “culture of approvals,” a tremendous
pressure manifested within the Bank (though rooted also in political-economic
pressures from lending states that want the business and sales generated
by Bank projects). President Wolfensohn has elevated the status of
improving project quality and challenging corruption within the Bank.
But, explains the operations specialist, there is still a basic inconsistency
even in Wolfensohn’s approach:

Although Wolfensohn came
on board and there was more emphasis on supervision, there is still
this schizophrenia. If you talk to task managers today, they have less
budget for supervision now than they did five years ago. It's saying
one thing and doing something else. We've got all these anti-corruption
activities, and that's positive and long overdue. But at the same time
there is still high pressure to lend, and we have things like this [the
new draft certification proposal for disbursements] coming up that are
going to make it easier to steal, and [provide] less budget for supervision.
We're going in two contradictory directions.<34

Wolfensohn’s impact at the
Bank has been mixed. There is no doubt that corruption has a higher
public profile than at any time in the Bank’s history. Many task managers
in Operations, who struggled in vain for decades to try to inject a
higher awareness of corruption and its corrosive impact on projects
and the Bank’s broader goals, now feel the tide is turning. But the
incessant pressure to lend coming from the Executive Directors pulls
in the opposite direction. According to one well-positioned task manager:

I think Wolfensohn has
opened the door now. You hear so many stories about him. My sense
when I walk down the halls is that one in five may be positive about
Wolfensohn, but the other four are not. One way or another he's turned
their world upside down, some of them more than others. He is unfortunately
sending some mixed signals, and frankly that's the biggest complaint
I hear. When I talk to people in the hall, they say "anti-corruption,
right, but then he's pushing us for lending." I think the biggest
complaint I hear about him is that he's sending these contradictory
signals. It's a fair and true complaint. But I also think that if
I were in his shoes, knowing the Bank as I do, I'm amazed that he's
done what he's done. You're talking about an entrenched bureaucracy
that has not only been accountable to no one in the past, but has had
so much wealth to play with that nobody could touch them, no one was
able to touch them, no one wanted to touch them. And here this upstart
comes in and starts screaming and jumping up and down, and swearing
and everything else. And this is just a total shock. He has turned
their world upside down. But at the same time, how do you change a
huge bureaucracy with the kind of history the Bank has, and the power
that it has? I'm surprised he's been able to do what he's done. I
have a feeling if it were entirely up to him, that we wouldn't be getting
these mixed signals quite so much. But he's got to play ball with some
people some of the time. This is not a one man show, as much as he
tries to make it so.

The answer, this individual
agrees, is to reduce lending until the quality of administration and
supervision in projects, both on the Bank’s part and on the borrower’s
side, is improved to a degree that the resources are not squandered.
He concludes: “We're a long way from turning the corner on the Bank's
culture. There will not be real progress until there's a genuine slowing
down of the lending program. Historically, but certainly over the last
20 years, you could demonstrate with ease that the Bank has lent more
money than the borrowers could absorb.”

1
Peter Masebu, “Another Call To Write Off Africa's Bilateral Debts,”
Africa News, November 2, 1999. Botchwey is a member of the Global
Coalition for Africa, an NGO based in Washington, D.C., and he heads
the coalition's unit on the African debt. The total African debt owed
to bilateral and multilateral lenders at the end of 1999 was approximately
$300 billion.

2
As of March 2000, public sector debt was $85.9 billion and private sector
debt was $58.5 billion. For clarification, it might be useful to explain
some terms. “Total external debt” refers all debt owed to all foreign
creditors by “Indonesia.” This includes foreign debt owed by the Indonesian
government (public sector) and by all firms operating in Indonesia (private
sector, whether domestic or foreign firms). “Total government debt”
(also called “public sector debt”) refers to all debt owed by the Indonesian
government and consists of external (“foreign”) debt and domestic debt.
Before the Asian crisis of 1997 and 1998, Indonesia had very little
domestic debt. But to recapitalize the banking system, the government
was forced to issue between Rp 530-610 trillion in Central Bank bonds
(SBIs). In dollars, this is roughly $80 billion in new domestic debt
on which the government pays about 12% in interest (a rate far higher
than interest paid on foreign debts). As of June 2000, roughly 85%
of the bonds issued to rescue that banking system had floating rates.

3
The World Bank noted in its June 2000 annual report on Indonesia that
three-quarters of the $81 billion increase was domestic government debt
to finance Indonesia’s banking rescue program. What the Bank failed
to mention was the important role the IMF and World Bank played in the
1980s to push through a highly risky banking deregulation (especially
Pakto 1988) that opened up the banking system without any protections
in place for supervision and control. That irresponsible set of reforms
was a time bomb that was finally triggered when the financial storm
hit Asia in 1997.

4
It should be noted that the external environment, particularly in the
Asian arena, is growing increasingly challenging for the countries of
Southeast Asia, especially Indonesia. A high cost will be paid for
moving too slowly, and many ASEAN countries could get left far behind.
The reasons for this include 1) the fact that China, long secluded during
the Cold War, has entered the Asian theater as a major competitor, 2)
reduced tensions between China and Taiwan will increase foreign investment
in Northeast Asia, 3) reduced tensions between North and South Korea
since the Pyongyang summit will also encourage investors, 4) the U.S.
approved Permanent Normal Trade Relations (PNTR) with China, and 4)
China will soon enter the WTO. Southeast Asia faces a real danger of
being swept over by an economic tsunami from the increased attractiveness
of countries in Northeast Asia. Indonesia and possibly Vietnam, the
two most populous countries in ASEAN, are the two major economic basket
cases in Southeast Asia and will likely be hardest hit by the growing
competitive pressures in the region.

7Criminal debt is distinct from “odious
debt.” Odious debt in international law is defined as loans accumulated
by an unrepresentative and oppressive government which are used to repress
a country’s citizens. It does not matter if the loans were used according
to prevailing law or were stolen or misallocated by officials. Most
criminal debt is also odious debt, but not all odious debt is criminal
debt. Also, odious debts are exclusively external. Criminal debts
can consist of both foreign and domestic debt. In the Indonesian case,
significant parts of the country’s foreign debts are criminal. But
much of the public debt to bail out the domestic banking sector is also
criminal debt because the debt was caused by criminal behavior by bankers
and corporations.

8

9
The World Bank does open the door for the International Court of Justice
and the U.N. to play a role in disputes involving the Bank and its clients.
See Article X, Section 10.03, Paragraph ( c ), in “General Conditions
Applicable to Development Credit Agreements,” International Development
Association (a component of the World Bank Group), Washington, D.C.,
January 1, 1985. In September, 1993, the Bank created its “Inspection
Panel,” which was designed to provide an independent forum for people
directly and adversely affected by a Bank-financed project. Aggrieved
parties can use the Panel to request the Bank to act in accordance with
its own policies and procedures for a specific project. The
scope of the Panel is severely limited by the condition that no requests
can be made after the closing date of a project or once 95% of a project
loan has been disbursed. In short, the Inspection Panel is useless
as a forum for redress on criminal debt already accumulated.

10
See John W. Head, “Evolution of the Governing Law for Loan Agreements
of the World Bank and Other Multilateral Development Banks,”
American Journal of International Law, 90(2) April 1996, pp.
214-234. Also see Aron Broches, “International Legal Aspects of the
Operations of the World Bank,” 98 Recueil des Cours 297 (1959,
III) and Aron Broches, Selected Essays – World Bank, ICSID, and Other
Subjects of Public and Private International Law (1995).

11See Head, p. 220, n. 50.

12
Part of the explanation for why the Bank has not lived up to its fiduciary
mandates rests with the geopolitical motives of major powers like the
United States. A remarkably candid 1996 U.S. Government Accounting
Office study observed that “much of the impetus behind U.S. participation
in the Bank during the Cold War era was derived from the perceived utility
of the Bank in containing communist expansionism in the developing world.
One Bank official commented, for example, that because of U.S. concern
about communist insurgency in the area, the Bank remained active in
several sub-Saharan African countries long after the corrupt nature
of these governments became evident.” (Chapter 2).

13GAO report, April 2000, p. 11.

14All of these quotes are from Mitch
McConnell, “Statement of U.S. Senator Mitch McConnell on FY2001 Appropriations
for International Financial Institutions,” press release, April 6, 2000.

15
Recent evidence that corruption continues to be a major problem despite
a change of national leadership weakens the new government’s ability
to legitimately demand relief for criminal debt.

16
Devesh Kapur, John P. Lewis, and Richard Webb,
The World Bank: Its First Half Century (Washington, D.C.: Brookings
Institution Press, 1997), Vol. I, p.492. The authors quoted from a
memorandum of the then director of the Resident Staff, Indonesia, Jean
Baneth.

17
Ibid.

18
Ibid., p. 493.

19
Press Release No. 98/1426/EAP, The World Bank.

20
In January of 1999 another Bank document on Indonesia was leaked. This
one cited corruption as one of a set of “serious structural problems
which were well known to the Bank.” “Indonesia Country Assistance Review,”
revised draft, the World Bank, January 6, 1999, p.1.

25
Interview with a senior Bank official (K), World Bank Headquarters,
Washington, D.C., April 10, 1999.

26
Unless otherwise noted, the quotes used in this section are from confidential
interviews conducted in Washington, D.C. in April 1999.

27
The respondent continued: “I've argued for years that having a system
is fine. Having an accounting system and having safeguards and audits
-- it's all fine in principle. But if you don't have people who are
running the system who are trustworthy, you're in bad shape.” He said
that spot-checking is needed all the way through a project. “When I
used to go out in the field on a project, and very few task managers
would do this, I would spend a day with the accountant on the project.
And I would just randomly say ‘let me see this, this and that [invoice],’
and then I would take those transactions and go from A to Z with them.
Go out and see whether in fact this vendor exists. And I've had cases
where they didn't exist. You have an invoice, a name of a company,
and they supplied office machines. You go look, there's some office
machines sitting there, and you can't count all of them. They've never
been used. They're just sitting there. So you have this sense they
were just bought for the sake of buying them. You go out and you check
at a store that sells office machines -- the same make and model number.
You price it and you find it's half the price of what we're billed for.
You go to the address [of the vendor] and they don't exist. You ask
around the neighborhood and they never did exist. So here I've got
a fraudulent invoice for equipment that isn't really being used at twice
the market price. I mean if that isn't fraud, I don't know what is.
And so you come back with that information, and you find that it's a
pattern, you know you've got a serious problem on your hands. The auditors
don't pick that stuff up.”

28
The source added: “They never really audited the lending operations.
They audited the Bank's own internal budget. We had the Operations
Evaluation Department auditing the projects, but not necessarily from
a financial point of view, just from a goals point of view. It was
indeed required every year to have a local audit done. But if the audits
don't uncover the problems sufficiently, or if they skirt the problems,
and if they don't submit a management letter, which would detail in
written form the problems, then you've only got a paper exercise that
doesn't bring about any changes.” One task manager I interviewed pointed
out that there are also serious conflicts of interest within the international
auditing profession that cast doubts on the reliability of audits of
the books for Bank projects. She explained: “I had a case where an
independent auditor performed audits on a project. They had probably
ten times more business on that [same] project – setting up a management
information system, setting up accounts, and so on. I asked [a professional
accountant at a major firm] if there's a conflict of interest if I'm
an accountant-auditor, and I've set up the books, and I've assisted
the client in financial management, and now I come in and audit that
same client. [He] said, “yeah it is, but it happens all the time.”
He said it's something that the industry has never tried to address.
The accounting industry, like the banking industry, is not going to
jeopardize their relationships with their clients. If you're Price
Waterhouse Coopers Librand, are you going to go in and audit the books
of your client and say that things are in atrocious shape with all kinds
of fraud and embezzlement? All you can do is say the books are in order.
It's very difficult to get somebody who can do it in an unbiased way.
And even when those firms are not directly involved with a particular
project or company, they often have the government or a ministry as
a client. For them it's a business decision. He told me that it is
a conflict, but we don't look at it as a conflict.”

29
Interview with a senior Bank official (J), World Bank Headquarters,
Washington, D.C., April 10, 1999.

30
“1997 Framework,” p_.

31
Ibid., note 27. Thus 30,000 out of 40,000 procurement contracts, representing
three-fourths of total purchases and 40 percent of total value, are
not carried out under international competitive bidding rules. It is
overwhelmingly in this realm that some 30 percent of the value gets
stolen inside Indonesia. Note that a single project could have hundreds
and even thousands of procurement contracts within it in any given year.
Although 40,000 sounds like a staggering number, the number of active
projects is much smaller.

32
Confidential interview, Washington, D.C., April 1999.

33
She also rejected arguments that small-scale corruption does not seriously
undermine projects. “If you see that happening [on a small scale],”
she said, “you can almost bet that with every bit of procurement there's
some hanky panky going on one way or another. It adds up and it's a
constant blood-letting, every day, money's going out, $500 here, $1,000
there, $3,000 there. It's a constant blood-letting. How can the project
function?”

34
The idea behind the new disbursement plan is that a country’s domestic
project management capability will be evaluated, upgraded, and then
certified by the Bank as fiscally qualified, and thus responsible.
The task manager found this approach alarming. “And they say now we
will lend to you. Not only that, but because you have a system in place
that we've approved, we'll give you the money in tranches. If you report
back every quarter, or whatever, we'll just keep releasing the money.
In my opinion, and a number of other people at the Bank – certainly
people at the operational level – it’s just inviting more problems because
even with the controls we have in place now, this spot-checking and
so on, we can't begin to do justice to proper fiscal management.”